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My goal is to give you a basic understanding of what stock options are all about without hopelessly confusing you with unnecessary details. I have read dozens of books on stock options, and even my eyes start glazing over shortly into most of them.
Auto-Trade is a service offered by several on-line brokers. Auto-Trade makes it possible for an investor to carry out an options strategy in his own account without becoming an options guru or making all the trades on his or her own.
Never buy a mutual fund unless it is a no-load index fund with the lowest cost structure. (I will tell you where to find it later.)
Most smart people have set up a Roth IRA, 401(k), or other qualified retirement program. For some of them, it may be the only stock market investment they own.
In spite of the odds against winning, many people seem to like to invest in individual stocks – sort of like picking horses at the race track.
The 10K Strategy is my favorite investment strategy. I have used it to make an average of over 50% a year for three out of four consecutive years. I have now added a twist to the strategy so that annual returns might be less than those years but there should be a much higher likelihood of its succeeding.
Exchange-Traded Funds, or ETFs, are index funds that trade just like stocks on major stock exchanges. All the major stock indexes have ETFs based on them, including: Dow Jones Industrial Average (DIA), Standard & Poor's 500 Index (SPX), and Nasdaq 100 Composite (QQQQ).
Learn about some of my favorite stock option resources.
Terry’s Tips carries out an options strategy designed to significantly outperform the market and other conventional investments.
The strategy does not require picking the right stocks or timing the market. It primarily trades options on the S&P 500 (SPY) and can be used in an IRA.
Square
(SQ) is considered one of the most innovative companies in the payment
processing space. That said, the stock has done what most tech stocks have done
so far in 2021 … gone nowhere. In fact, the shares are up less than a percent
this year. Moreover, SQ has been in a trading range between 200 and 280 for
most of the past seven months.
Despite the sluggish overall performance, we are keying on the support of the 200-day moving average, a trendline that currently sits just above 210. Other than a handful of daily closes below it in May, the stock has respected the support of the 200-day, most notably during the past week. Moreover, we’re using a bullish credit spread, which does not require the stock to go up. Rather, all we care about is that the short put remains out of the money. That’s why we’re banking on the support of the 200-day (blue line), as our short put is at the 210 strike (red line).
If
you agree that SQ will stay above its 200-day moving average, consider the
following trade that relies on the stock remaining above 210 through expiration
in six weeks.
Buy
to Open SQ 23Jul 205 put (SQ210723P205)
Sell to Open SQ 23Jul
210 put (SQ210723P210) for a credit of $1.80 (selling a vertical)
This
credit is $0.02 less than the mid-point
of the option spread when SQ was trading above $219. Unless the stock rallies
quickly from here, you should be able to get close to this amount.
Your
commission on this trade will be only $1.30 per spread. Each spread would then yield $178.70. This
trade reduces your buying power by $500 and makes your net investment $321.30
($500 – $178.70). If SQ closes above
$210 on July 23, both options will expire worthless
and your return on the spread would be 56% ($178.70 / $321.30).
The iShares
Transportation Average ETF (IYT) is a price-weighted ETF dominated by rail,
trucking and freight companies. The top 10 holdings comprise 77% of the ETF,
with nearly half of that coming from four railroad names – Kansas City
Southern, Norfolk Southern, Union Pacific and CSX. Other familiar names in the
top 10 include FedEx and UPS.
The
transportation sector has been hot since the March 2020 bottom, as shown by
IYT’s gain of more than 130%. The ETF hit a record high a month ago but has
retreated 4% in the past month with rising fuel prices (crude oil hit a
two-year high this week) taking a bite out of profits. The overall uptrend is
intact, however, guided by IYT’s 50-day moving average. The trendline’s steady
increase has hardly changed during IYT’s recent sideways price action. More
importantly, IYT has not closed a single day below the 50-day since February 3.
But now the trendline is being tested, as IYT sits just one percent above this
support.
We’re banking on this support holding and for the long rally to continue. Our credit spread’s short strike is below the 50-day, so a hold at this trendline would keep our spread out of the money.
If
you agree that IYT will stay above its 50-day moving average, consider the
following trade that relies on the stock remaining above 265 through expiration
in six weeks.
Buy
to Open IYT 16Jul 260 put (IYT210716P260)
Sell to Open IYT 16Jul
265 put (IYT210716P265) for a credit of $1.45 (selling a vertical)
This
credit is $0.03 less than the mid-point
of the option spread when IYT was trading above $270. Unless the ETF rallies
quickly from here, you should be able to get close to this amount.
Your
commission on this trade will be only $1.30 per spread. Each spread would then yield $143.70. This
trade reduces your buying power by $500 and makes your net investment $356.3
($500 – $143.70). If IYT closes above
$265 on July 16, both options will expire worthless
and your return on the spread would be 40% ($143.70 / $356.30).
Pandemic?
What pandemic? FL, the ultimate in a brick-and-mortar, mall-based store, has
been a monster performer this year. The stock is up a gawdy 50% and has more
than doubled since last August. The company reported stellar earnings on Friday
before the bell that easily topped expectations. Earnings came in at $1.93 per
share compared to the $1.12 consensus analyst estimate. Sales hit $2.15
billion, which made the $1.9 billion estimate look silly. Of course, sales were
higher than a year ago during the pandemic. What’s impressive is that FL topped
its 2019 Q1 performance as well.
Prior
to earnings, the stock dropped nearly 13% in three days after hitting a
two-year high on Tuesday. But FL rebounded on Friday, gaining 2%. More
importantly, the shares found solid support at their 50-day moving average.
This trendline has been instrumental in supporting FL’s nine-month rally. In
fact, the stock has closed below the 50-day just twice since late
August. Currently, the 50-day sits at 59, while the stock is just below 61. At
the current rate of incline, the 50-day should be around 60, which is where
we’re playing an aggressive credit spread.
If
you agree that FL will stay above its 50-day moving average, consider the
following trade that relies on the stock remaining above $60 through expiration
in eight weeks.
Buy
to Open FL 16Jul 57.5 Put (FL210716P57.5)
Sell to Open FL 16Jul
60 Put (FL210716P60) for a credit of $1.00 (selling a vertical)
This
credit is $0.05 less than the mid-point
of the option spread when FL was trading just below $61. Unless the stock
rallies quickly from here, you should be able to get close to this amount.
Your
commission on this trade will be only $1.30 per spread. Each spread would then yield $98.70. This
trade reduces your buying power by $250 and makes your net investment $151.30
($250 – $98.70). If FL closes above $60
on July 16, both options will expire worthless
and your return on the spread would be 65% ($98.70 / $151.30).
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Options are not suitable for all investors as the special risks inherent to options trading my expose investors to potentially rapid and substantial losses. Please read Characteristics and Risks of Standardized Options before investing in options
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